Morrison reports disappointing Christmas trading

WM Morrison is the first of the ‘big four’ grocers to report its Christmas trading figures, and as widely expected, they have been disappointing – with total sales down 0.9%, alongside a 2.5% decline in like-for-like growth (excluding petrol and VAT).

There are two glaring deficiencies in the Bradford-based grocer’s proposition that have been key contributors to its poor performance over the festive period:

  • the lack of an online grocery offer; and
  • the lack of a convenience store estate.

Need to catch up – but proceed with caution

Management have openly admitted they need to quickly catch up with rivals on both of these fronts, but we would urge caution in their approach, particularly regarding development of the online offering.

Morrison is steadily making progress in fine-tuning an online proposition, using the £70m acquisition of online baby retailer Kiddicare.com as its platform. This has been supplemented by the launch of its online wine offering – morrisonscellar.com – in November.

We strongly believe that developing the platform in-house will be the best strategy for Morrison, and its acquisition of a minority stake in New York-based online grocer Fresh Direct in 2011, is seen as providing a vital learning experience in operating what should eventually be a successful and profitable online model.

Don’t buy Ocado

It has been widely suggested that Morrison should consider an acquisition of Ocado as a means of bridging the gap with its rivals – but the purchase of a loss-making online grocer with strong entrenched-links to Waitrose would not serve its purpose. The ill-fated acquisition of Safeway in 2004 taught Morrison’s a significant lesson regarding the pitfalls of biting off more than it can chew.

In-Convenience

But the lack of a convenience format could be viewed as an even greater failing than the lack of an online presence. The combination of high food inflation and tighter household budgets has led to consumers migrating away from the traditional weekly shop, towards more frequent top-up shops – predominantly in smaller format stores in their local catchments.

Morrison’s has been left in the wake of its rivals on this front, which have not only established significant convenience store networks, but are focusing their expansion efforts on this channel, as they shun the traditional large-format stores.

Even Asda, which traditionally was the only other exclusive large-format grocer alongside Morrison, stole a march on its rival with the acquisition of 193 Netto stores in 2010.

Stuck in the middle?

As with many other retail sub-sectors, the grocery market is becoming increasingly polarised – with the hard discounters such as Aldi and Lidl performing exceptionally well at the lower-end of the market, with their no-nonsense Every-Day-Low-Price (EDLP) strategies striking a chord with price-conscious consumers. Meanwhile, at the opposite end, Waitrose is benefitting from its strong focus on quality.

This leaves mainstream grocers such as Morrison, increasingly squeezed. This year Morrison will find its work increasingly cut-out, as it grapples with rising inflationary pressures in food and resurgent competition – particularly in the guise of Tesco – which will serve to further dampen profits.

We also believe that Morrison has, to a certain extent, alienated its core customer base with its move to develop a more premium fresh food-led offering.

Conclusions?

2013 will see Dalton Philips and his team working extremely hard on a number of fronts. Not only do they need to play catch up on two key fronts, but also need to develop and communicate a clear message on its proposition that will not only put it back in touch with its core customer base in the North, but also appeal to new customers in the South as it spreads its presence in this region.

We will provide further commentary on the trading statements of the other major multiples as they release their results this week.


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